Savers pay for federal reserve policies to inflate house prices and save the banks

When the federal reserve buyers Treasury notes or mortgage-backed securities, it merely prints money. Unlike ordinary banks or citizens, the federal reserve doesn’t need money in its accounts in order to buy things. The federal reserve doesn’t usually print a great deal of money; it usually tries to print enough to match the increase in value of goods and services in the economy. The first policy response of the federal reserve in a downturn is to lower interest rates to stimulate the economy, but when interest rates hit zero, the only tool available is the printing press, and they aren’t afraid to use it.

Monetary Deflation from the Housing Bubble

The collapse of the housing bubble caused a great deal of mortgage debt to vanish because when banks make loans that don’t get repaid, and they cannot recover the loan amount through foreclosure and resale of the asset, deflation results. In effect, the losses unprint money. The main reason we haven’t seen inflation from the federal reserves endless quantitative easing (fancy term for printing money) is that the new money being printed is merely offsetting money being destroyed by bank write downs from consumer deleveraging. (Also, some inflation is being exported to countries with a currency pegged to the dollar.) For six straight years, deleveraging was ongoing, but in the 4th quarter of 2013, the trend reversed. Is inflation right around the corner?

The federal reserve can keep printing money as long as bond investors don’t believe printing money is inflationary. Now that consumer deleveraging stopped, money is no longer being destroyed faster than the federal reserve can print it. In my opinion, the main reason the federal reserve decided to taper its asset purchases and thereby print less money is due to the increase in debt shown in the chart above.

The federal reserve works to prevent deflation by stimulating borrowing or printing money when the economy contracts; however, the federal reserve must be very careful: If the federal reserve prints too much money, inflation expectation will cause investors to abandon the bond market, bond prices would crash, interest rates would spike, nobody could afford today’s house prices at 10% interest rates, and the resulting housing market crash would rival 2008.

Not everyone is happy with the federal reserve’s policies. Every economic policy has consequences. Usually, these are short-term, the economy recovers, and we get back to a somewhat freer market; however, this time around the short-term policies have become the new normal, and the consequences create chronic pain for many, but mostly savers.

Our financial system is so corrupt you might say that a fish rots from the Fed.

How else can one describe a regime that punishes savers and rewards borrowers and speculators for years on end? Our central bank is essentially taking billions of dollars a year from average Americans, who are still struggling to get by in a bombed-out economy, and it is giving it — yes, giving it — to the very banks that helped cause the 2008 financial crisis in the first place.

The federal reserve controls short-term interest rates through buying and selling Treasury notes. These rates determine how much interest people earn in savings accounts, the asset class favored by senior citizens. The federal reserve lowered interest rates to zero to force money out of savings accounts in hopes this money would seek out riskier asset classes and stimulate the economy. Since seniors are risk adverse, most have left their savings in place, and those that need those savings to survive — which is most seniors — are depleting their savings accounts to make ends meet.

Richard Barrington, an analyst with Moneyrates.com, estimates the Fed’s policies have cost savers $757.9 billion since the crisis, in an analysis released Tuesday . That’s approaching $1 trillion, which used to be considered a lot of money, even to bankers, before the crisis. The Fed, meanwhile, has only given the world a little assurance that its policies will change at some point in the distant future.

“It’s a stealth bailout,” Barrington said. “Low-interest-rate policies have helped bail out banks, the stock market and real estate, but the Fed has not publicly acknowledged the cost of those policies.”

Money-market rates have been stuck between 0.08% and 0.10% but the annual inflation rate has been, at least nominally, 1.5%. That’s pretty low for inflation, yet this spread eroded the purchasing power of American deposits by $122.5 billion over the last year alone, Barrington said.

Barrington’s analysis, by the way, is conservative. It only counts what inflation has done to savers. It does not include what savers might have made if interest rates were closer to historic averages. And after five years, these costs are only mounting.

“Unlike the other bailouts we’ve seen, this one has become open-ended,” Barrington said.

He does not attribute this ongoing folly to corruption, as I do. He sees it, more charitably, as the result of “thinking that’s trapped in the past.” Our economic problems are unprecedented, and yet the Fed is still making comparisons to what they think should have been done in the 1930s.

The Fed has been purchasing tens of billions of dollars per month in U.S. Treasurys and mortgage-backed securities from banks. It has been cutting back this program, and many Fed watchers expect it to end by October, but so far these purchases have totaled more than $3.3 trillion.

And what does the Fed have to show for this? Economic growth averaging only about 2% a year. A sluggish labor market. And artificially raised stock and real estate prices that may not hold if the Fed ever stops manipulating interest rates to such historic lows.

Most Americans, by the way, haven’t participated in these lofty stock market gains that continue to widen the gap between rich and poor.

Bankrate.com on Monday released a survey of more than 1,000 households that showed 73% are “not more inclined to invest in stocks.” It was the third year in a row that this survey uncovered negative sentiments regarding the stock market, even as the Standard & Poor’s 500 Index (SNC:SPX) has doubled since hitting bottom in 2009.

After getting burned twice in one decade — the 2001 Internet bust and the 2008 financial crisis — it is easy to see these gains as part of yet another financially engineered scheme. Average Americans either don’t have money to risk or they simply refuse to be herded into a casino, even at a time when money-market rates and bank deposits are delivering negative returns relative to inflation.

It just doesn’t make sense to the average mind. The Fed has responded to a crisis caused by too much borrowing by encouraging even more borrowing. It has allowed too-big-to-fail banks to become even bigger. It has helped inflate the national debt to nearly $18 trillion with its monthly asset purchases. It has created a junkie economy that seems hopelessly addicted to historically low interest rates, ever-increasing borrowings, and a non-stop printing press rolling out dollars.

You’d think banks would show some gratitude for all the dramatic adjustments made in the economy just to save them, but no. They have responded by raising fees and overdraft charges on customers, wrongfully foreclosing on homes, charging usury rates on credit cards and other consumer loans whenever possible, cheapening customer service, suing each other for the shoddy mortgage-backed securities they sold each other, laying off thousands of their own rank-and-file employees, and handing out fat bonuses to their top executives.

“Like any other economic decision, the Fed’s low-interest-rate policies should be looked at in cost-benefit terms,” said Barrington. “So far, the net benefits appear debatable in light of the costs.”

Boisterous cheers for rising asset prices, largely fueled with the Fed’s funny money, have shouted down the debate. Payoffs are how corruption spreads.

Now some might ask, what do I mean by corruption? Janet Yellen, she seems like a nice lady. Ben Bernanke, he seems like a nice guy. Other people at the Fed, they seem all right when you hear them speak. Do you really mean to tell me they’re corrupt? That they’re bad people?

Well, let’s put it this way: Ugly people don’t always know they’re ugly. Fat people don’t always realize that they’re fat. Stupid people truly don’t know that they’re stupid. That’s just part of being stupid. And people who’ve been completely co-opted by the wealth and power of a globalized banking system, do you think they know when they’ve become tainted by the normalized corruption all around them? Do you think they even want to know that they are captured regulators?

They may appear well-intentioned. They may even have good intentions, for all I know. But I’ve noticed they rarely, if ever, use the term “moral hazard” anymore. It’s just not part of their calculus. They have blinded themselves even to the law of gravity with the sheer amount of brain power that they put into everything they say and do. And they’re completely trapped in this thinking that trillions for the banks will solve everything.

The federal reserve’s highest priority is the preservation of the banking system, no matter the consequences. They are trapped in thinking that trillions for the banks will solve everything because that is the only thing that will solve the problems at the banks — whatever happens to the rest of the economy is a secondary concern.

You don’t need to take a class in economics, or even history, to suspect that the Fed can’t hold interest rates to zero for more than half a decade without consequences. And that it can’t keep printing money forever.

The Fed argues it’s all part of a necessary evil, without fully conceding that it is evil nonetheless. The Fed will also say that it saved the world from a financial crisis that could have been far worse. But this remains a hypothetical argument.

What if instead of bankers, we gave trillions of dollars to ordinary citizens running small businesses? Wouldn’t that have saved us from a financial crisis, too? Or what if instead we just let the little people earn a little interest on their savings accounts?

“Wouldn’t that three-quarters of a trillion dollars have been better off in people’s hands where they could spend it?” Barrington asks.

The Fed is supposed to intervene in the supposedly free-market economy when there’s a crisis. That’s what the Fed was created to do. But for how long? Barrington said it’s about time to do the math and figure out if the price America paid to bail out its banks and its economy was worth it.

That the Fed has gone this many years without counting it up smells like rotting fish to me.

“In 2013 the gold market saw 21% growth in demand from consumers which contrasted with outflows of 881t from ETFs. The net result was that global gold demand in 2013 was 15% lower than in 2012, with a full year total of 3,756t.

China and India both recorded increased demand in 2013. Consumer demand in China rose 32% in 2013 to a record level of 1,066t, while in India demand rose 13% to 975t.

Indian demand remained strong. Despite several import related curbs during 2013,gold demand remained buoyant, with a full-year total of 975t compared to 864t in 2012. We estimate that unofficial imports almost doubled compared with 2012, to
compensate for the decline in official imports.”

Those are the facts, with maybe minor descrepanicies in the numbers because no one can measure gold demand and supply exactly.

The WGC refers to the buyers and sellers of the gold ETFs as “investors”, but they are more accurately labeled speculators. Those in China and India that the WGC refers to as consumers would probably be described more accurately as savers.

Opinions are not equal just because everybody has one. Some are informed and some are based on ignorance, and there are all the shades inbetween.

Do you still have the email that I sent you? I would be most interested in the date, because after calling the peak wrong, my recollection is that I modified it, and ended up being correct on my second try. The part I remember is that I said the pog would decline to either a closing at 1283 or 1257, and then would start increasing. I think the lowest closing was 1284?

It will now start rising. The bullion banks, refiners, and producers, (large commercials), are currently holding the smallest number of pure shorts, (not net), for as long as I can find COT records, in this case, 2006. If that sounds like mumbo jumbo, it means that the bullion banks and the producers currently do not care to hedge for falling prices.

Maybe, but a couple of weeks ago I said the pog would decline due to the hedgies going long and the commercials going short. el O may remember because he disagreed with me. Whether my opinion sucks or not, I was right. I may or may not be dogmatic, but I was right.

awg, yes I remember, but I only disagreed with what you described as the cause of the decline, not the price movement itself. Indeed, you called the decline so you were right, but point being.. with regard to gauging price movement, there is so much more going on behind the scenes than just the COT data.

btw, a lot of people who buy/accumulate bullion/gold coins over time don’t even value their holdings, as most understand there are no guarantees re price. However, history shows that gold will be worth ‘something’ at any given point in time, and on the plus side, it’s portable and has no counterparty risk attached to it, unlike housing.

IR … that’s right. The market knows best and the market has punished gold. The carnival barkers form these kookie opinions that gold is being suppressed by central banks and governments and that the Fed actually did not taper, but increased to bond buying to all-time highs.

Questions: does the saying ‘cash is king’ hold true when prices are falling?
Will fiat currency fall into the ‘cash is king’ category if it can be debased?
What other options do savers have to avoid debasement?

That turned out to be the case during the economic crisis. The US Dollar increased in value as just about everything else (including gold) declined. So if we look at history, when prices are falling, CA$H is indeed king.

“What other options do savers have to avoid debasement?”

That is a personal investment choice you should make. My only suggestion is to set stop loss sell orders, and don’t listen to carnival barkers who have been wrong, wrong, wrong about gold.

Gold is declining for all the fundamental right reasons. That’s not my opinion … that’s just a fact. Gold has declined over $500 in the last two years.

It may sound like heresy to some in the industry, but Catherine Rampell has a point in the Washington Post today – a home is not a good investment.

Calm down. That comes with a caveat – it’s not a good investment as an investment.

Catherine even quotes the highly regarded economist Robert Shiller:

The fact that Americans still financially fetishize homeownership baffles me. Never mind that so many people lost their shirts (among other possessions) in the recent housing bust. Over an even longer horizon, owning a home has not proved to be a terribly lucrative investment either. Don’t take my word for it; ask Robert Shiller, winner of the 2013 Nobel Prize in economics who previously became a household name for identifying the housing bubble.

“People forget that housing deteriorates over time. It goes out of style. There are new innovations that people want, different layouts of rooms,” he told me. “And technological progress keeps bringing the cost of construction down.” Meaning your worn, old-fashioned home is competing with new, relatively inexpensive ones.

Over the past century, housing prices have grown at a compound annual rate of just 0.3 percent once one adjusts for inflation, according to my calculations using Shiller’s historical housing data. Over the same period, the Standard & Poor’s 500-stock index has had comparable annual returns of about 6.5%.

Yet Americans still think it’s financially savvy to dump all their savings into a single, large, highly illiquid asset.

So yes, a home is a lousy investment in terms of returns next to other types of investments. …

But Rampell does have a point – the constant drumbeat of the voices that housing prices should, in perpetuity, continue to rise and at a rate faster than inflation is irrational on the face of it.

The problem with comparing housing returns to stock returns is that inevitably the dividends are included in the stock returns, but the housing dividend is ignored. By housing dividend, I mean the ability to live in your “investment”. Shiller is only counting the appreciation as return and totally ignoring the tangible benefits of ownership.

Currently, the SPY index is yielding 1.86% in annual dividends. Let’s say the rent on a median OC house is $2,500. You would need to invest $1.6 million in the SPY etf to cover your annual rent on a house. On the other hand you could buy the same house for cash with $500,000, in effect covering the rent in perpetuity. As an owner, there will some other expenses that detract from your “yield” – taxes, insurance, maintenance – but you are still killing the stock market on a dividend yield basis.

Also, if you buy a house in OC the historical appreciation rate is closer to 4.4%, not the paltry 0.3% that Shiller suggests.

Actually, you can compute the dividend value of owning a house. If you measure the difference between the cost of ownership and the cost of rental, a house is either cashflow positive or negative, and the cumulative impact of the difference between those costs is a dividend of owning the house.

Where this gets tricky is trying to evaluate changes in costs in the future and computing a net present value of that cashflow. If the owner is using fixed-rate financing, it’s somewhat easier because the cost of ownership is known, but the rate of rental increase is still a guess. If the owner paid cash, they must consider the opportunity cost of the money as well. The calculations I provide on each property provides a starting point, but doesn’t project into the future.

I’ve been thinking about creating an app that will take the basic data from a property details calculation and allow user to put in different rates of appreciation and inflation and compute net present value. It will be a future project once I get the site the way I want it. As someone reminded me in an email, Rome wasn’t built in a day.

Silly MR… the sooner people stop equating a home lived-in as investment, the sooner a real recovery can actually materialize.

1) Unless a home lived-in generates an income stream, it should NOT be considered as INVESTMENT. Period! What it should be considered: the ultimate in inflation-subsidized, unproductive, debt-fueled CONSUMPTION. Besides, if it truely was a quantifiable investment, buyer-demand would NOT need to be heavily subsidized.

2) When you buy a home to live-in, you’re only buying an ownership interest from .gov; ie., stop paying your prop taxes, then, it goes back to its legitimate owner, the State. Also, homedebtors must rent the capital needed to buy, so they’re even buying into a smaller ownership interest than cash buyers.

3)Even if by chance, home values keep-up with inflation going forward, you’re not generating any new wealth by tracking inflation, but only a substantial negative carry in purchasing power.

btw, historical data is COMPLETELY useless without a current perspective of analysis.

It would seem your grievances are with Robert Shiller then. My comments were only in response to his faulty analysis.

Nonetheless:

1) Living in a home that costs less than comparable rent is a de facto income stream, and by your definition, an investment.

2) If you fail to pay taxes on ANY investment, you will eventually suffer penalties and jail time. Stocks, bonds, and bullion gold are also subject to leased government interest, by your defintion.

3) When you borrow money at a rate less than inflation, a positive return is generated for the borrower as the debt is destroyed. The after-tax rate my home mortgage is 2.87%. On my condo it’s 1.87%. The lenders are the ones losing money to inflation.

Why do depositors keep their money in a savings account paying 0.1% interest? I think because they don’t know any better or they have an irrational sense of fear. So yes in one sense, they aren’t too bright.

The other entity responsible is Fannie Mae, which is in government receivership, and also not known for being too bright.

If it were private investors lending me money, not depositors content with “safety” or bankrupt companies in receivership, I might be questioning why they continue to make bad loans too.

A house is both an asset and a liability. It has minimal investment value, but it has utilitarian value above and beyond its financial value. The problem with Schiller’s analysis is that he fails to take into account factors like living in the house and public school tuition ($0) vs private school ($1000-$1500/mo.). There are also tax savings through the MID, and Prop 13 in California. I disagree with the tax subsidies, but they are the law, and unlikely to change soon, so there you are.

How would you compute the value of the house if you paid cash for it on your 21st birthday? What if you were married and had two kids? What if the home was in a distinguished school district so you wouldn’t have to pay private school tuition. What about intangibles like low crime, good weather, and low density? Would it be a good investment to have all these essentially annuities paid back to you over a lifetime? Seems like money well spent to me.

And after you are done using it, someone will pay you more than you paid, in inflation adjusted terms? Sounds even better.

His prior opinions were shaped too heavily by working for a small boutique NPL servicer. He was out of touch with 95% of the servicing industry. Hopefully, working for a ratings agency will expose him to a wider variety of business models.

Having made some progress toward stability in January, the housing market experienced a slight backslide in February, Freddie Mac reported Wednesday.

In the company’s second-ever Multi-Indicator Market Index (MiMi), analysts at Freddie Mac reported a national index value of -3.11, putting the U.S. market just on the “weak” side of a stable market (ranging from index values of -2 to 2).

Compiled using Freddie Mac’s own data along with local market statistics, MiMi was created to assess where each single-family housing market sits compared to its own long-term stable range in terms of home purchase applications, payment-to-income ratios, proportion of on-time mortgage payments, and local employment. The inaugural index for January was recorded at -3.08.

Focusing on the positive, Freddie Mac noted housing has improved by 0.67 points year-over-year, indicating an overall trend toward strength, with more than half of all states seeing improvements.

“Despite a slowdown over the winter months, the housing market continues to show improvement in most states, although at a somewhat slower pace,” said Frank Nothaft, VP and chief economist at Freddie Mac.

While some MiMi indicators have weakened—home purchase applications look particularly soft in many areas—Nothaft added that “gains in local employment and loan performance have really helped many markets across the country, especially those that were hardest hit.”

As of February, 11 states and the District of Columbia were recorded in their stable ranges of housing activity, unchanged from January. Out of that group, however, only Louisiana and Montana recovered compared to January, with those at the bottom—Vermont, Texas, and South Dakota in particular—veering closer toward instability.

Based on data reported so far for March, deputy chief economist Len Kiefer says the company expects an improvement despite continued weakness in home purchase applications.

“The other indicators are moving in the right direction … so we’re likely going to continue to see that [positive trend] just because of the firming up on those indicators,” Kiefer said.

According to Redfin agent Minni MacFarlane in Orange County, Calif., “Competition can still get intense, but because prices have risen so much, my clients and I try to be more discerning about how far we should go to win a home. The past two years we’d compete against people camping out in their cars or entering lotteries to win new homes. This year, a bidding war is more likely to drive the price of a home higher than it’s worth competing for, and I think it will be easier for us to walk away from a situation like that.”

Other data highlights:

Multiple Offers:

In the most competitive market, San Jose, Calif., 89.8% of homes had multiple offers, up from 86.7% last month, but short of last year’s 92.8%.
Baltimore (50.9%) and Boston (75.9%) had the largest year-over-year increases in bidding wars, up from 42.9% and 72.4%, respectively.
In San Diego, 66% of homes saw multiple offers, a significant drop-off from last year’s 89.2%.

Price Escalations:

Across 19 markets, 37.9% of homes sold above the asking price, up from 22% at the start of the year, but down from 44.8% last year.
While the average home in these markets sold at or slightly below asking price, homes in San Jose, Calif., sold for a whopping 13.8% above list price, up from 5.5% above last year.
In San Diego, the average home sold 4% below asking price, significantly lower than a year ago when the average home was selling for about asking price.

Washington, D.C., Redfin agent Tom Lewis told us, “Buyers are getting frustrated by the competition. I try to help my clients stay calm and keep things in perspective when they get into a bidding war, because once you’ve already made an offer, it can be tempting to become overly aggressive. But in my experience, patience pays off. The right home is always out there, and it doesn’t need to come with regrets.”

This is Redfin’s clients, not the whole market. I could see why all-cash buyers would be drawn to Redfin because they would pay the lowest possible commission. If these stats represent changes in the broader market, that would be a big surprise. Based on other news stories, I would have expected the opposite to be true.